Could the 10% rule be sabotaging your Retirement? | Breaking the Retirement Planning Myths

Following rules of thumb for your retirement could spell disaster for your retirement, and that's the last thing we want to happen for you. We've already discussed two other rules of thumb. Today we're going to discuss the third in our four-part series on rules of thumb in retirement and how they could destroy your retirement as we dive into the 10% rule.

Are you saving enough for retirement? Hey, I'm Casey Weed, CEO and founder here at Howard Bailey Financial, also a certified financial planner practitioner, and we're here to discuss rules of thumb. If you didn't catch our first two videos, go back, check out those videos and dive in deeper. If you have any questions while we discuss the 10% rule today, drop them right down there in the comment section.

I'll be sure to personally answer each and every one of your questions. If you have any ideas for new content you'd like to see me create, drop that down there in the comment section and maybe I'll create a video just for you. What is the 10% rule? It's a rule that tells us how much we should be saving for retirement.

Some have argued this is now the 20% rule, maybe it's the 10% rule. The longest running number here is 10%, the rule of 10%. Not that long ago, I had a family member that had just started her first job and she said, Casey, how much should I be saving out of my paycheck every month for retirement? Well, the reality is you should be saving as much as you can possibly afford to save for retirement, but the rule is 10%.

I would argue it probably should be closer to 20%, but this is why it's so intensely personal and we have to discuss today the different factors that you need to consider when trying to determine if you are actually saving enough for retirement. One of the things I'm encouraging you to go back and watch is that 4% rule video, because if you're a long ways out from retirement, you probably should be following that 4% rule of thumb that says, hey, at retirement, you're going to be able to take within about a 90% degree of confidence, maybe 95%, depending on our inputs or our assumptions, that you can take 4% out of your account every year for the rest of your life, adjust it for inflation, and you shouldn't run out of money. If we're trying to determine what we need in the future, that can be a good rule of thumb for us to back into how much we should be saving today.

Let's look at a couple of different scenarios though, and I think you'll see the problem. If we look at a 25-year-old, we're going to look at a 25-year-old, another 25-year-old, a 55-year-old, and we're going to look at all the different assumptions that help us arrive at this number. So this first individual, 25 years old, got one of their first jobs, they're making $50,000 a year, and then we're going to have to assume some type of rate of return.

So when we're assuming this rate of return, we're not talking about any potential returns that we're promising to you or any specific products or investments that we offer here at Howard Bailey. This is simply a benchmark return that's been developed by Morningstar, and you can check out a link to that benchmark return. It's not an investable index, but it gives you a gauge of what you might be able to expect in the way of rate of return, depending on how aggressively you're going to allocate.

This is their 10-year average as of today of their aggressive benchmark return at 8.6%, and they want to retire at age 65. Now they retire, they have Social Security, they have Medicare, it's a pretty traditional line in the sand for most people contemplating retirement. They want to retire at 65, they haven't saved anything yet, and if they save 10% a year, that's $5,000 per year, at 8.6% over 40 years, it'll turn into $1.5 million.

That's about $400 a month, and that's pretty astounding. That is the magic of compound interest that you can turn such small dollar amounts into large amounts over long periods of time if we're investing those dollars and getting a rate of return, turning it into $1.5 million. Now, if they spend $35,000 a year at retirement, they've done pretty good.

Right now, 4% of $1.5 million, that's $40,000 plus another $20,000, that's $60,000 a year. That might be enough, but we haven't accounted for inflation yet, so it probably isn't enough for them to be saving 10% a year. However, if they're going to continue to increase that income, then they stay at that 10% withholding, then they might have enough for retirement, but it's going to be unique to their own unique situation, as we can see here.

And if their income explodes, let's say they go from making $50,000 to a half a million dollars a year, they may not need to save $50,000 a year when they're making a half a million dollars a year if they're not increasing their spending and increasing their lifestyle to accompany that income that they continue to make. That is known as lifestyle creep, and we want to avoid that at all costs. As we make more, we want to be careful that we don't continually spend more every time we get a raise.

We want to bank those dollars, especially if you're one of those in the fire movement and you want to retire early. Let's look at someone that's, again, 25 years old in the same scenario. They don't have anything saved for retirement.

They want to retire at age 65, but we're going to use Morningstar's conservative benchmark return because they don't have the same risk tolerance. They're not comfortable taking on that level of risk. The conservative benchmark return as the date of this video, the 10-year average on Morningstar's benchmark return, 4.78%, just shy of 5% per year.

That's going to have a dramatic impact on what they end up with by the time they're 65, all the way down to $573,000, about $600,000. Even if they're only spending $35,000 a year still, they're probably running out of money in retirement. They need to be saving a lot more for retirement unless they're going to continue to get those raises, not increase their lifestyle, and save more dollars.

They might be the state conservative. Maybe they don't have to be really aggressive. Then we get to our third scenario.

You're 55 years old. You have $200,000 a year in annual income. You're an aggressive investor.

You're using that 8.6% return from Morningstar's benchmark, retiring at age 65, and you did a good job. You saved a half a million dollars already. You saved a half a million dollars, and you're going to continue to save 10% a year.

That's $20,000 a year over the next 10 years. Then your half a million dollars is going to turn into $1.4 million by the time you hit that retirement date. Now, are you going to continue to invest that aggressively every year when you're this close to retirement? Probably not.

You'd definitely be violating the rule of 100 if you were to do so. If you're spending $125,000, as we're outlining in this scenario, then you haven't saved nearly enough for retirement in order to give yourself that 90%, 95% confidence level that you're probably looking for when you want to make sure you're not going to run out of money in retirement. How much should you be saving for retirement? Well, that's intensely personal, and I want to give you the opportunity right now to create your own personal financial plan.

Visit with one of our financial planners on our team virtually or in person, and we can run these scenarios for you. We're offering you the opportunity to do that on a complimentary basis, and we'll sit down with you, run your numbers, give you your own scenario, so you know how you should be investing today to make those retirement dreams come true. Just call the number on your screen, and make sure you watch our next video as we're going to be diving into inflation with the rule of 70.